Twitter reported a lower-than-expected number of monthly active users in its second-quarter earnings report before the bell Thursday.

Shares of the company dropped 9 percent in pre-market trading, after the company reported 328 million monthly active users, unchanged from the previous quarter.

"You have zero user growth versus Facebook reporting 70 million new users [after the bell Wednesday]," Aegis Capital internet analyst Victor Anthony said on CNBC's "Squawk Box." "It's not a recipe for a stock you want to buy."

Advertising revenue also decreased 8 percent year-over-year, totaling $489 million compared to $535 million in the same quarter last year.

Expectations vs. results

EPS: 12 cents vs. 5 cents expected, according to Thomson Reuters.

Revenue: $574 million vs. $536.7 million expected, according to Thomson Reuters.

Monthly active users: 328 million vs. 329 million expected, according to StreetAccount.

Twitter started the year strong when the company reported 9 million more monthly active users than expected in the first quarter. User growth has been a concern for investors, who see the 328 million active Twitter users as severely lagging behind Facebook's more than 2 billion.

The social network admits it needs to continue to bring its revenue growth in line with its user growth, but Twitter executives remain confident recent efforts are helping to reverse recently declining revenues.

"While we still have a lot of work to do for revenue growth to get it to track audience growth, the improvements in revenue growth reflect the progress executing against our top revenue generating products in the second quarter as well as strengthening business fundamentals," chief operating officer Anthony Noto said on a call with investors.

Twitter launched a less data-intensive version of its service called Twitter Lite on April 6. It can only be accessed via mobile web browser and takes up less than 1 megabyte of storage.

CEO Jack Dorsey said Twitter Lite is an effort to attract users in low-data, remote parts of the world, such as as India, where Twitter found the "app was way too slow to access."

On an earnings call with investors, Dorsey said initial results from Twitter Lite "look really positive" but declined to provide any statistics, warning that it was too early assess the success of the service.

A crackdown on abusive activity is making progress, as Twitter reported it is taking daily action on ten times as many abusive accounts compared to the same time last year. By limiting functionality or suspending accounts, Twitter found abusive users generated 25 percent fewer abuse reports. Mistreatment on the platform has scared off both advertisers and potential buyers, as Salesforce ruled out a bid for Twitter in part from concerns the social platform could not handle online abuse and trolls.

Online advertising is increasingly an issue for Twitter, as other technology companies such as Alphabet and Facebook continue to eat up more digital advertising revenue. Advert engagement grew 95 percent year-over-year in the second quarter, yet ad sales fell 8 percent from the previous year.

Twitter is having outages involving erroneous locking of accounts for supposed 'automation' violations when according to the users they did nothing to trigger such a lockout. Furthermore when the users try to fix it by providing their phone number, the code provided by twitter does not work. Be interesting to know how many users are affected by this. I haven't done an online search yet but have heard from four different people about this interesting problem.

I hope not too many. If the verification code didn't work users could also contact support which is mentioned on their website. I'm sure if Twitter is bombarded with support requests they'll remedy the problem quickly. They can't risk cutting their user-base.

Twitter's definitely got a problem. Heard from more friends whose accounts were locked for no reason.Some can get unlocked, some cannot. So... my account was locked an hour ago. Ridiculous. Fortunately, my account took the code and its working again. Wondering how many thousands or millions of people they are losing with this.

Twitter Inc (NYSE: TWTR) is overvalued, and I’ve believed so for years. And while I’ve never shorted the shares, I still never cease to be amazed at the many permutations of the bull case for TWTR stock.

TWTR 16.93 0.00 0.00% : Twitter, Inc.

All of the Bull Cases for Twitter Inc (TWTR) Stock Are Simply Bull

There have been so many reasons for why “now is the time” to own Twitter stock. After its fall from 2015 levels around $50, TWTR was a turnaround play. CEO Jack Dorsey’s return was greeted with much optimism, but with investors somehow willing to ignore that he was also the CEO of Square Inc (NYSE: SQ). There was a focus on cost-cutting that would improve margins.

A $10 million deal with the NFL in 2016 was touted as a huge driver for what was then a $15 billion stock. (I woke up this morning to see the market cap is now “a bit” off from that, at $9.6 billion.(YAHOO FINANCE SHOWS $12.4 BILLION)

Then Twitter was going to sell itself to everyone from Walt Disney Co(NYSE: DIS) to Alphabet Inc (NASDAQ: GOOGL) to Salesforce.com, Inc.(NYSE: CRM). How’d that go?

Through all the bull cases, however, there has been one simple, consistent problem: Twitter is not profitable.Excluding the huge amount of Twitter stock used to pay employees, it’s not even close. Twitter stock can’t maintain any upside until that changes. And I remain highly skeptical that it ever will.

The Numbers Behind Twitter StockBased on third quarter guidance, Twitter is on pace to generate about $700 million in Adjusted EBITDA this year. That figure excludes a projected $450 million in share-based compensation: TWTR stock given to the company’s employees. That figure isn’t a cash cost, but it’s real nonetheless, as each compensation share dilutes existing shareholders.How significant is the dilution? Between 2014 and 2016, a Twitter shareholder saw the size of his stake in the company (on a percentage basis) shrink by about 15%. In that two year period, Twitter added 100 million shares — nearly all of them through share-based compensation.

Depreciation and amortization are non-cash charges but capital expenditures aren’t. They are guided to the $300 million-$400 million range for this year. And Twitter has about $25 million in cash interest expense related to its convertible bonds (it also books non-cash interest charges as well).

In other words, that $700 million figure, which sounds like a profit, actually implies negative free cash flow excluding the issuance of shares. Ignoring changes in working capital, and assuming $350 million in capex, Twitter will generate about $325 million in free cash flow this year. It will do so by issuing $450 million in stock.

That’s the core problem here. Twitter does report non-GAAP net income — but that, too, excludes dilution. And this isn’t a new problem. Twitter reported $444 million in “adjusted” free cash flow in 2016. Share-based compensation was $615 million.

Twitter, as a company, does not generate cash on its own merits. It only creates positive free cash flow through the heavy issuance of Twitter stock.

So the question, then, is how does that change?

Twitter Is Unprofitable

The answer might be that it doesn’t and it won’t. Twitter’s profits actually will marginally improve this year against 2016 — even with a likely decline in reported Adjusted EBITDA. That figure, with stock-based compensation added back, was $136 million last year. It seems likely to clear $200 million this year.

But that’s after a first half that was better than the second half appears to be. Q3 guidance suggests a modest improvement in earnings before dilution but not much (about $35 million vs. $25 million). It’s certainly not enough to get reported profits enough above dilution to cover interest expense and any necessary capital spending.

And what changes going forward? User growth has stalled out. Not even the free publicity and engagement driven by President Donald Trump’s use of the platform has helped on that front. Snap Inc (NYSE: SNAP) might be a disappointing stock, but as a platform, it is attracting younger users, some of whom likely could have helped Twitter grow.

Advertising rates are falling, and as a result revenue actually declined in each of the year’s first two quarters. The shift to video will accelerate that rate compression, and the need to pay for content will pressure margins.

Twitter at the moment is a toxic contribution. It’s functionally unprofitable. Revenue is declining. And margins are likely to compress. For all the other discussion, those core problems remain. Together, they create a stumbling block to the next bull case for Twitter stock.

TWTR Stock Is a Sell

Really, what’s left for Twitter to do?

Is it really going to become a major player in media by airing second-tier, Pac-12 sports and SportsCenter knockoffs? It’s clearly been for sale for years, and no one was interested. Going forward, there’s probably not a lot of demand for a no-growth, unprofitable business, particularly at a $10 billion valuation (plus cash on the balance sheet).Twitter is a neat tool and an interesting platform. But it may be that there’s just no way in sight to monetize it to a point where it generates real, consistent profits. That doesn’t mean Twitter is going bankrupt soon.

But it does mean that valuing Twitter stock at $10 billion is something close to lunacy.

Twitter's 140-character limit died today after a long battle with Facebook. It is survived by brands, publishers and personalities, who will miss its insistence on wit and getting to the point.

That's right: Twitter is expanding its character limit on text posts to 280 characters from 140, starting with a subset of users. The company is describing the move as a test, but the writing is on the wall for this succinct art form.

"Although we feel confident about our data and the positive impact this change will have, we want to try it out with a small group of people before we make a decision to launch to everyone," the company said in a blog post Tuesday. "What matters most is that this works for our community—we will be collecting data and gathering feedback along the way. We're hoping fewer Tweets run into the character limit, which should make it easier for everyone to Tweet."

Even though Twitter has been hinting at the change for more than a year, it is rolling out the longer limit slowly for fear of alienating its most hardcore users.

"140 characters isn't any easy construct, but that's exactly why I love it," says Jill Sherman, head of social strategy at DigitasLBi. "People and brands are forced to stop and think about what they really want to say. And it makes the feed pithy and easily scannable. I'll definitely miss it."

The constraint became a defining brand for Twitter, forcing its users to condense their thoughts into only the most essential words. Twitter users developed a text message-like shorthand that became its own language—"you are" became "u r"—and, more significantly, big ideas were often reduced to hashtags. And it made equals of everyone, in a way: From the greatest wordsmiths to the leader of the free world to the casual user, everybody shared the struggle of editing their thoughts down to their sharpest point.

Just look at President Trump's Twitter prose to see the power that even four can convey ("Sad!").

The original limit was enforced because that's how much room was left in an SMS text message after allowing 20 characters for a user name. To be sure, that had become a bit of a relic. What are character limits when posts are now crammed with videos, photos, GIFs, emojis and links?

In the end, the 140-character limit symbolized a problem for Twitter: It made it harder to get people to tweet, especially if they weren't used to it. For many, it could be the difference between becoming a new user and giving up immediately. After all, what can you possibly say in just 140 characters?

"I will admit to having something of an obsession with getting as much meaning into 140 characters as possible," says James McQuivey, a researcher at Forrester. "Someday I'll tell my grandkids how hard it was in my prime: 'We had to Tweet with just 140 characters, uphill, both ways!'"

The new limit gives more space to breathe, let thoughts expand, and possibly lower the difficulty level for anyone new to the service.

Some of the most active users say Twitter is walking away from part of what makes it so special.

"There's a sense of loss," says Noah Mallin, head of content at MEC. "The 140-limit really forced you into the clearest, most distilled expression. I'm sure the growth of people screen-shooting text helped to move this along, so I get that they saw a need. I think they want to still keep it from going to a longer character count than this. Otherwise it becomes Medium and we are blogging instead of micro-blogging."

People indeed often got around character limits by sharing images of longer texts, one of the behaviors that prompted CEO Jack Dorsey to start considering changes to the maximum.

Also, Twitter stopped including photos and other media elements toward the character limit.

Twitter is not extending the new limit of 280 character to Japan, China or Korea, because those languages do more with fewer characters, the company said in its blog post.

English, French, Portuguese and Spanish were included in the change.

"Trying to cram your thoughts into a Tweet," Aliza Rosen, Twitter product manager, and Ikuhiro Ihara, senior software engineer, said in the blog post. "We've all been there, and it's a pain."

Research shows the character limit is a "major source of frustration," according to the post, with 9 percent of tweets in English running up against it. In markets where the limit is less of a problem, more people tweet, the company says.

"We understand since many of you have been Tweeting for years, there may be an emotional attachment to 140 characters. we felt it, too," the post reads. "But we tried this, saw the power of what it will do, and fell in love with this new, still brief, constraint."